Xunlei Ltd Q4 FY2021 Earnings Call

Welcome ladies and gentlemen, and thank you for your patience. You’ve joined Xunlei’s Fourth Quarter and Fiscal Year 2021 Earnings Conference Call. At this time, all participants are in the listen-only mode. Please be advised that today’s conference is being recorded. I would now like to turn the call over to your host, Investor Relations Manager, Ms.

Thank you, everyone, and good day. Thank you for joining Xunlei’s fourth quarter and fiscal year 2021 earnings conference call. Our earnings release is now available on our IR website to supplement our prepared remarks for today’s call. Joining me today are Eric Zhou, Chief Financial Officer, and a Senior Vice President of Finance. I will first present a prepared remark from our Chairman and CEO, Mr. Jinbo Li, highlighting our fourth quarter operations and our strategies for 2022. Then, Mr. Eric Zhou, our CFO, will discuss the financial results in detail and provide guidance for the first quarter of 2022. I welcome any questions you may have after the management’s remarks. Before we begin, I want to remind you that today’s discussion will contain forward-looking statements under the Safe Harbor provision of the U.S. Private Security Litigation Reform Act of 1995. These statements are based on management’s current expectations and are subject to risks and uncertainties that may result in actual results differing materially from those expressed. Please refer to our SEC filings for a detailed description of the risk factors that may affect our results. Xunlei does not assume any obligation to update forward-looking statements unless required by applicable rules. We will use both GAAP and non-GAAP financial measures in this call. A reconciliation of non-GAAP to comparable GAAP measures can be found in our earnings press release. Please note that all figures are in U.S. dollars unless stated otherwise. Now, I will read the prepared statement from Mr. Jinbo Li, Chairman and CEO of Xunlei Limited.

Thank you for joining us today. In 2021, we made some important progress in our major business segments. Our total revenue grew 28.3% to $239.6 million and achieved a net profit of approximately $1.1 million, a dramatic improvement over a net loss of $14.1 million in 2020. Even though we coped with challenges due to COVID-19 and the evolving government regulations that affected our operating environment, we were able to conduct our business effectively and remarkably improved our performance as compared with last year. I’d like to take this opportunity to thank our employees for their diligence and dedication to serving our customers during a trying period. Because of their agility, resilience, and dedication, we are able to start fiscal year 2022 with a solid foundation. In particular, I’d like to express my gratitude to the team responsible for our membership subscription business, which generated significant cash flows to fund our innovative efforts. I’m also appreciative and proud of the outstanding performance our cloud computing colleagues achieved during 2021. And lastly, I’d like to thank our employees in the corporate development and innovation department for their outstanding efforts that created new growth opportunities, which are expected to produce potentially exciting results in the days to come. Back to our fourth quarter of 2021, the total revenues for the fourth quarter reached $71.1 million, an increase of 18.6% from the previous quarter, exceeding the revenue guidance we provided in the third quarter. The performance was driven primarily by the sequential growth of our cloud computing products and other internet value-added services. Now I’d like to provide some details on operating results. Starting with our largest revenue growth driver. Cloud computing and other internet value-added services contributed $44.7 million in revenue, which accounted for approximately 62.9% of total revenue, representing 26.9% quarter-over-quarter growth in the fourth quarter. Cloud computing revenue alone reached $28.2 million, representing a 12.8% quarter-over-quarter increase, driven by increased customer demand and bandwidth capacity expenses. Xunlei has a unique competitive edge in its shared cloud computing business, which enjoyed uninterrupted growth for a number of years, and the growth was driven by rising demand for bandwidth for short-lead and live streaming products. We are optimistic that high demand for live streaming products may persist into 2022. In the second half of 2021, we began to explore new markets for our live streaming services, and we are pleased to see our efforts begin to yield encouraging results. For the fourth quarter of 2021, revenue from our other internet value-added services, which mainly consists of live streaming services, reached $16.4 million, and grew 61.6% as compared with the third quarter of 2021. We expect the growth momentum to continue into 2022. Now turning to our subscription business. Membership subscription contributed $23.7 million in revenue, accounting for approximately 33.3% of total revenue. Subscription revenue grew 4.3% from the previous quarter. The increase was mainly due to the newly added cloud storage function, which helped user retention as well as year-end marketing activities. At the end of the fourth quarter of 2021, the number of subscribers reached 4.39 million, up approximately 5.8% as compared with that at the end of the third quarter. It’s encouraging that our premium membership subscription continues to gain popularity. Now turning to our online advertising. Even though online advertising went through a challenging time due to competition and evolving governmental regulations, we still saw a 33.1% sequential growth in revenue last quarter. This was partially attributable to our efforts to enrich user experiences and improve operations and partly to a recovery from an especially hard-hit third quarter. Going forward, we’ll continue to follow regulations on internet advertising and try to mitigate their impact by delivering more user-friendly features and increasing customer loyalty. Before I conclude my remarks, I’d like to say that despite the ebb and flow of the capital market, we intend to remain focused and do what we are good at, and I trust our efforts will be rewarded. With that, I will hand the call over to Mr. Eric Zhou, our Chief Financial Officer. Eric will cover our financial results in detail and share our outlook.

Thank you, Jinbo, and hello, everyone. Thank you again for joining Xunlei’s fourth quarter and year 2021 earnings conference call. I will now go through the details of our financial results and wrap up with our revenue guidance for the first quarter of 2022. For the fourth quarter of 2021, total revenues were $71.1 million, representing an increase of 18.6% from the previous quarter. The increase in total revenues was mainly attributable to increased revenue from cloud computing and other IVAS business. Revenues from cloud computing and other IVAS were $44.7 million, representing an increase of 26.9% from the previous quarter. The cloud computing revenue was $28.2 million, representing a 12.8% sequential increase. The live streaming revenue was $14.5 million compared with $8.35 million in the previous quarter. The increase of cloud computing and other IVAS revenues was mainly driven by increased demand for cloud computing and new live streaming products we launched in the second half of 2021. Revenues from subscription were $23.7 million, an increase of 4.3% from the previous quarter. The number of subscribers was 4.39 million as of December 31, 2021, compared with 4.15 million as of September 30, 2021. The average revenue per subscriber for the fourth quarter of 2021 was RMB34.3, compared with RMB35.4 for the previous quarter. Revenues from online advertising were $2.8 million, representing an increase of 33.1% from the previous quarter. The increase in online advertising revenues was largely due to business recovery and our marketing efforts during the fourth quarter. Cost of revenues was $37.6 million, representing 52.8% of our total revenues, compared with $30.4 million or 50.7% of the total revenues in the previous quarter. The increased cost of revenues was mainly attributable to increased sales of our cloud computing and other IVAS services. Bandwidth costs as included in cost of revenues were $22.8 million, representing 32.1% of our total revenues, compared with $21.7 million or 36.2% of the total revenues in the previous quarter. The increased bandwidth costs were mainly due to increased demand for our cloud computing products, which were consistent with the increased cloud computing revenue. The remaining cost of revenues mainly consisted of costs related to the revenue-sharing costs for our live streaming products and depreciation of servers and other equipment. Gross profit for the fourth quarter was $33.3 million, representing an increase of 13.3% from the previous quarter. Gross margin was 46.7% in the fourth quarter, compared with 48.9% in the previous quarter. The increase in gross profit was mainly due to increased cloud computing and other IVAS revenues. The decrease in gross profit margin was mainly due to the decreased portion of subscription revenues to total revenues, which have a high gross profit margin, and increased portion of live streaming revenues to total revenues, which has a lower gross margin. Research and development expenses for the fourth quarter were $16.6 million, representing 23.3% of our total revenues, compared with $16.8 million or 28% of our total revenues in the previous quarter. Sales and marketing expenses for the fourth quarter were $6.6 million, representing 9.3% of our total revenues, compared with $6.8 million or 11.3% of our total revenues in the previous quarter. General and administrative expenses for the fourth quarter were $11.1 million, representing 15.6% of our total revenues, compared with $11.4 million or 19% of our total revenues in the previous quarter. The decrease was primarily due to the decreased legal and consulting expenses. Operating loss was $1.7 million, compared with an operating loss of $5.7 million in the previous quarter. The decrease in operating loss was primarily due to increased gross profit as discussed above. Other income was $1 million, compared with other income of $0.5 million in the previous quarter. Net loss was $0.5 million, compared with a net loss of $5.1 million in the previous quarter. Non-GAAP net income was $1.7 million in the fourth quarter of 2021, compared with a net loss of $3.1 million in the previous quarter. The decreased net loss and increased non-GAAP net income were primarily due to the increase in revenues of each business line and improved gross profit as discussed above. Diluted loss per ADS in the fourth quarter of 2021 was approximately $0.01 compared with a loss of $0.08 in the third quarter of 2021. As of December 31, 2021, the company had cash, cash equivalents, and short-term investments of $239 million, compared with $228.3 million as of September 30, 2021. Now, I’d like to walk you through the financial results of fiscal year 2021. Total revenues were $239.6 million, representing an increase of 28.3% on a year-over-year basis. The increase in total revenues was mainly attributable to an increase in revenues from our cloud computing and live streaming business. Revenues from cloud computing and other IVAS were $136.2 million, representing an increase of 52.7% on a year-over-year basis. The revenues of cloud computing business were $94.8 million, representing a 47.4% year-over-year increase. The increase in cloud computing and other IVAS revenues was mainly attributable to the increased sales of cloud computing services as a result of our expanded service capabilities and increased demand from our customers. Revenues from subscriptions were $91.2 million, representing an increase of 8.2% on a year-over-year basis. The increase is mainly due to the number of subscribers increasing from 3.83 million in 2020 to 4.39 million in 2021. Revenues from online advertising were $12.3 million, representing a decrease of 7.1% on a year-over-year basis. The reduction was primarily due to lower advertising placements starting in the second quarter of 2021 as a result of evolving regulations of the Chinese internet industry that negatively affected our advertising business. Cost of revenues was $118.6 million, representing 49.5% of our total revenues in 2021, compared with $92.6 million and 49.6% of the total revenues in 2020. The increase was mainly due to increased sales of our cloud computing products and revenue-sharing costs for our live streaming business. Bandwidth costs included in cost of revenues were $80.7 million, representing 33.7% of our total revenues, compared with $62.4 million or 33.4% of the total revenues in the previous year. The increase was mainly due to the increased sales of our cloud computing services. The remaining cost of revenues mainly consisted of costs related to the revenue-sharing costs for our live streaming equipment and depreciation of servers and other equipment. Gross profit for the year was $120.2 million, representing an increase of 28.2% on a year-over-year basis. Gross margin was 50.2%, the same as the previous year. The increase in gross profit was mainly due to increased revenues from cloud computing and live streaming businesses. Research and development expenses for the year were $61.9 million, representing 25.8% of our total revenues, compared with $55.5 million or 29.7% of our total revenues in the previous year. The increase was primarily due to the increased employee-related costs. Sales and marketing expenses for the year were $24.6 million, representing 10.3% of our total revenues, compared with $18.1 million or 9.7% of our total revenues in the previous year. The increase was primarily due to increased marketing and promotional activities incurred for Mobile Xunlei and new live streaming business during this year. General and administrative expenses for the year were $36.9 million, representing 15.4% of our total revenues, compared with $33.9 million or 18.2% of our total revenues in the previous year. The increase was mainly due to increased amortization expenses regarding newly awarded restricted share units under the company’s 2020 share incentive plan. Impairment of assets, net of recoveries for the year, was $1.2 million, comprising a one-time write-off of certain receivables and prepayments based on impairment assessments, compared with $5.1 million in the previous year. The decrease was largely due to a one-time write-off of certain receivables and prepayments in relation to our cloud computing business accrued in the previous year. Operating loss was $4.3 million, compared with an operating loss of $18.8 million in the previous year. The decrease was mainly due to increased gross profit from cloud computing, subscription business, and live streaming business as discussed above. Net income was $1.1 million in 2021, compared with a net loss of $14.1 million in the previous year. Non-GAAP net income was $7.3 million in 2021, compared with a loss of $11.8 million in the previous year. Diluted earnings per ADS in 2021 were $0.02 as compared with a loss of $0.21 in the previous year. Turning to our revenue guidance, for the first quarter of 2022, Xunlei estimates total revenues to be between $77 million and $80 million, and the midpoint of the range represents a quarter-on-quarter increase of approximately 10.4%. This estimate represents management’s preliminary view as of the date of this release, which is subject to change and any change could be material.

The first question comes from George Pang with Private Investor.

For the first quarter of 2022, Xunlei estimates total revenues to be between $77 million and $80 million, with the midpoint indicating a quarter-on-quarter increase of about 10.4%. This estimate reflects management’s initial perspective as of the release date and may be subject to significant changes. The first question comes from George Pang with Private Investor.

Basically, his question is about the management of the company. Please share with us Xunlei's future growth strategies and priorities of business development. Let me try to explain to you. In the short term, through our positioning efforts, we have made some progress, narrowing our net loss to $0.5 million in the fourth quarter of last year and achieving a net profit of $1.1 million for the full year of 2021. Furthermore, most of our businesses were improving and we are seeing continued momentum, and we will strive for greater improvement by increasing operating efficiency, optimizing expenses, and exploring and focusing on areas of significant growth potential. In the long term, we will maintain Xunlei's competitive edge while seeking more long-term and sustainable growth opportunities as well as exploring more exciting products and services. Our strategic acquisitions and the expansion of our live streaming business last year have shown initial and encouraging signs of progress, which contributed to a significant portion of total revenues in 2021. We expect that the momentum of growth will continue. Thank you for your question.

We see significant growth potential. In the long term, we will maintain Xunlei's competitive edge while seeking more sustainable growth opportunities and exploring exciting new products and services. Our strategic acquisitions and the expansion of our live streaming business last year have shown initial encouraging signs of progress, contributing significantly to total revenues in 2021. We expect this growth momentum to continue. Thank you for your question.

And his question is, we saw a net loss in the fourth quarter declined significantly as compared with the third quarter. What is your profit forecast for the coming quarters? Thanks for the question. The significant reduction in net loss in the fourth quarter is a result of rapid business growth and expense optimization, but we usually do not provide guidance on net income or losses for the coming quarters. That being said, we are hopeful that we will improve both top line and bottom line in the coming quarters. By the way, in the fourth quarter earnings release, we provided a guidance of our anticipated total revenue for the first quarter of 2022, which is in the range of between $77 million and $80 million, which represents a sequential quarter-over-quarter increase of about 10%. Thanks for your question.

We usually do not provide guidance on net income or losses for the upcoming quarters. However, we are optimistic about improving both our top line and bottom line in the next few quarters. In our fourth quarter earnings release, we provided guidance on our expected total revenue for the first quarter of 2022, which is projected to be between $77 million and $80 million. This represents an approximate 10% increase compared to the previous quarter. Thank you for your question.

Our next question is from Sidney Fong with private investor. Your line is open.

In the fourth quarter earnings release, we provided guidance on our expected total revenue for the first quarter of 2022, which is projected to be between $77 million and $80 million, indicating a sequential increase of approximately 10%. Thank you for your question. Our next question is from Sidney Fong with a private investor. Your line is open.

His question is regarding our investment in a country code for an innovation technology company that is applying for an IPO, and he is inquiring about the status of the IPO. He also wants to know about our investment amount and the expected rate of return. We invested approximately RMB60 million in an innovation technology company limited around 2016, which is known as Insta360. Xunlei holds about 8.73% equity in the company. Insta360 submitted its IPO application to the Science Technology Innovation Board at the Shanghai Stock Exchange last year, and the Stock Exchange has approved it. Currently, the China Securities Regulatory Commission is reviewing the case. That's all the information we have at this time. It's difficult to predict the rate of return on investment right now. If the IPO is approved, and if the company's performance remains strong along with a bullish stock market over the next couple of years, our return on investment could be significant. Thank you.

The China Securities Regulatory Commission is currently reviewing the case. That's all we know today. It's really hard to predict the rate of return on investment at this time. If the IPO is approved, and the company's performance remains strong while the stock market is in a bull market over the next couple of years, our return on investment could be significant. Thank you.

Thank you. And our next question comes from Bill Anten with a private investor. Your line is open.

Hi, hello.

Hi, hello, yes.

Sorry. Hi. That was a great presentation. Thank you. I have some questions about the Xunlei headquarters building. So first of all, what's the total investment in this building so far? And when do you expect to move in? And another question would be that will Xunlei build out some office space for rental income? That's it for my questions, and thank you.

In Xunlei Tower, we have spent approximately RMB300 million. The total budget for the building is approximately RMB450 million, or about U.S. $70 million. The construction area of the building is around 65,000 square meters, and the building has 26 stories. We have completed the construction of the Xunlei headquarters building, and we anticipate moving in around June this year. If the impact of COVID-19 won't last long. People might know we are currently facing some challenges again due to COVID-19. We expect the completion of the headquarters building will not only reduce our operating costs but also generate some rental income. Because the building has not started operations, the rental income information is not available now. I'd like to see the building is mainly for self-use. Thank you for your question.

We anticipate moving into the new headquarters building around June this year, assuming the impact of COVID-19 does not extend too long. Currently, we are facing some challenges due to COVID-19. Completing the headquarters will help reduce our operating costs and potentially provide some rental income, though we currently don't have that information as the building has not yet started operations. My primary focus is on using the building for our own purposes. Thank you for your question.

Thank you. And I'm showing no further questions. I'd like to turn the call back to Eric Zhou for closing remarks.

Well, thank you, again, for your time and participation. If you have any questions, please visit our website at irxunlei.com or send us an email to our Investor Relations. Have a good day. Operator, we conclude today's conference call. Thank you.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.